by T. GormanPosted on Posted in SECActions

The U.S. Chamber of Commerce published a report regarding the enforcement practices of the SEC titled “Examining U.S. Securities and Exchange Commission Enforcement: Recommendations on Current Processes and Practices, July 2015” (here). The Report contains twenty-nine recommendations for improving the program.

The recommendations are divided into ten categories: The use of administrative proceedings; Wells notices; admissions; what the Report calls duplicative regulatory enforcement; enforcement policy; improving Commission oversight of the enforcement process; the transparency of the enforcement process; streamlining the investigative process; document requests during an investigation; and improving the efficiency of the investigative process. Interestingly, there are no recommendations dealing with remedies and the trend of imposing what some may view as ever increasing monetary penalties, particularly on individuals.

Key recommendations in the Report include:

Administrative proceedings: The first four recommendations in the Report deal with the use of administrative proceedings and, specifically selecting an administrative forum rather than brining the action in Federal district court. The recommendations include: developing a policy which would guide forum selection; creating a mechanism through which parties could challenge the SEC’s forum selection decision; permitting those who wish to have a jury trial to file a notice opting out of an administrative proceeding; and updating the Rules of Practice to increase pre-hearing discovery and permit depositions.

Wells process: Recommendations in this group include a call for a “reverse proffer” under which those who are potential defendants/respondents would be fully informed regarding the evidence prior to making a submission.

Admissions: The recommendations suggest a review of the current policy and, if it is going to continue, the development of guidance on their use.

Duplication in regulatory enforcement: This area addresses the issue of parallel proceedings, recommending that the SEC take a leadership role among regulators and enforcement officials in trying to streamline the use of overlapping and duplicative actions.

Enforcement policy: Comments on enforcement policy focus on broken windows and its focus on eliminating the idea that there is a “small violation” exception to enforcement. To facilitate the policy while conserving resources the Report recommends “the creative use of informal remedies . . .” to deal with smaller violations.

Oversight and transparency: In these areas the Report recommends developing a quarterly management report prepared by the staff for the Commissioners based on metrics developed by the Division of Economic and Risk Analysis. The report would focus on key areas such as significant “National Priority” investigations, those presenting novel or complex question, a post-mortem of unfavorable litigation results and new and emerging areas that may warrant investigation. Transparency would be enhanced by alerting those subject to the regulations of the agency to new interpretations and/or trends, publishing an annual report on the Enforcement Program and providing for public comment.

Facilitation of the enforcement process: This could be aided through several recommendations which include early notice by the Division to those projected to be involved in an investigation to preserve documents and an early dialogue with defense counsel regarding the types and categories of documents that will be sought. Consideration could also be given to establishing access to certain materials for the staff rather than actually producing the documents.

Efficiency of the enforcement process: A final group of recommendations focuses on increasing the efficiency of the enforcement process. These include improving the management of investigations, developing evaluation metrics, requiring departing staff to prepare a transition memorandum, providing closing notices, increasing staff training and increasing the integration of trial attorneys into the investigative process.

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by T. GormanPosted on Posted in SECActions

Microcap fraud has been a priority for SEC Enforcement at least since the creation of the Microcap Fraud Task Force two years ago. The cases typically focus on market manipulation claims of shell companies and pump-and–dump type schemes.

The SEC’s newest case in this area, SEC v. Gallison, Civil Action No. 1:15-cv-05456 (S.D.N.Y. Filed July 14, 2015) is perhaps a more complex version of the standard microcap fraud action. The complaint names thirty–four defendants, including fifteen individuals and nineteen entities. Key individual defendants include: Harold Gallision, a founder of defendant Moneyline Brokers, and a securities law recidivist; Carl Kruse Sr., Carl Kruse Jr., Frank Zangara, Charles Moeller and Mark Dresner. Key entity defendants are Moneyline, a purported broker dealer based in Costa Rica and controlled by Mr. Gallison; Bastille Advisers, Inc., Club Consultants, Inc., Jurojin, Inc., Sandias Azucaradas CR S.A., and Vanilla Sky, S.A., all affiliated with Moneyline and referred to as Moneyline entities.

Beginning in 2009, and continuing through most of the next year, Moneyline and the Moneyline entities operated as a broker-dealer under the control of Mr. Gallison. The firm sought U.S. based customers who wanted to manipulate the share price of microcap firms they controlled or owned. The schemes alleged here involved two manipulations. One involving Warrior Girl Corporation; the other Everock, Inc.

Under the Moneyline business model U.S. customers were instructed to transfer microcap shares to U.S. brokerage accounts in the name of Moneyline entities. The shares were unregistered. The shares were then comingled with other held assets to conceal the actual ownership from the brokers. The Moneyline entities represented to the U.S. brokers that they were the beneficial owners of the shares.

A group of Moneyline affiliated persons assisted customers with market manipulation schemes by directing matched trades. Those trades were designed to create the illusion of genuine investor demand, inducing others to purchase. By trading through numerous nominee accounts, the Moneyline entities and affiliated persons created the impression that unrelated persons were in fact purchasing and selling shares. The Moneyline entities and affiliated persons also assisted customers with promotional campaigns. Steps were taken to conceal the identity of the Moneyline entities and affiliates.

The Moneyline entities charged a commission of $25 per trade plus 5% of the trade value. Customers also paid the brokers fees and charges. Following settlement the Moneyline entities wired the proceeds to various bank accounts.

One of the manipulations here involved Warrior Girl. That firm, formed in 2002, was a shell company until at least June 2010. Its business changed over time from hydroelectric owner to mining and extracting oil from tar sand to online education and social media. Since at least 2009 Messrs. Kruse Sr. and Jr. controlled the firm. They orchestrated several promotional campaigns to liquidate their secret Warrior Girl holdings. Coordinated trading was conducted along with Mr. Gallison and others. False press releases promoting the company were posted on the OTC Markets website which in part concealed the holdings of Messrs. Kruse Sr. and Jr.

A second manipulation involved the shares of Everock Inc. That firm was formed in Ontario in 1999. Initially it claimed to own interests in mining properties and had nominal assets. In 2005 the firm re-domiciled from Ontario to Nevada, focused on the gold mining sector and merged with Everock Inc.

Defendants Frank Zangara, Charles Moeller and Mark Dresner coordinated with the Moneyline entities and affiliated individuals in the unlawful distribution and manipulation of Everock shares Several promotional campaigns were conducted, aided by false filings on the OTC Markets site and with the SEC.

The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of Section 17(a). In addition, it alleges violations of Exchange Act Sections 9(a), 10(b), 15(a), 17(a) and control person liability under Section 20(a). The case is in litigation. See Lit. Rel. No. 23303 (July 14, 2005).

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